More evidence of the positive turn in coal

IT HAS been a few years since anyone thought of the coal industry as a reasonable profit generator but when Hogsback saw the latest investment in coal by a pair of canny billionaires he was sure he caught a whiff of rising profits in the air.

Staff Reporter

Hans Mende and Fritz Kundrun are the inscrutable duo behind American Metals and Coal International, a business with a track record of picking investment winners.

Earlier this week Hans and Fritz plopped a spare $110 million on the table to snap up a large parcel of shares in Whitehaven Coal, an Australian miner emerging from a painful period of heavy losses, pit closures and environmental disputes.

Pinning down precisely how much of Whitehaven the two billionaires own of Whitehaven is not easy. Some newspaper reports say it added to a collective 15% while the formal notice from the company gave Fritz a 13.3% stake and Hans 12.4% – and the AMCI group 10.9%.

Whatever the precise shareholding it seems Hans and Fritz outlaid their $110 million to buy an extra 63.7 million Whitehaven shares, which can only mean one thing: the boys expect their money to grow – which it is, already.

According to what has been reported the extra Whitehaven shares cost Hans and Fritz about $1.70 each, which means they are already $12 million richer because Whitehaven shares are now trading at around $1.89.

Given Whitehaven traded to as low as $1.36 in May, the latest price is one way of measuring the steady increase in confidence that coal prices have bottomed and recovery really is on the way.

There are other signs of the overdue revival gathering strength, including:

  • a remarkable decision by the Supreme Court of India, which could set that country’s coal industry back by years

  • another positive assessment of the worldwide coal sector by a major investment bank
  • the creation of a coal derivatives trading desk by a big investment group because it is confident of China’s rising demand for coal.

The Indian legal decision, somewhat oddly, is one that could boost confidence in the Australian coal industry because what happened throws into doubt all coal-mining licences issued over the past two years.

According to the court, 218 licences awarded to dozens of companies are unconstitutional.

No-one in India seems to know precisely what the consequences of that decision might be but there is little doubt that investors are concerned, shaving 7% off the share price of Adani Power, a big player in the Indian coal and electricity generation industry.

Adani is also the company behind the giant Carmichael coal project in Queensland and while there is an obvious timing gap between what is happening to Adani’s coal business in India and what it is planning to do in Australia, the legal setback in the Indian Supreme Court should bolster its enthusiasm for Australian coal.

UBS is the investment bank with an improving view of the coal industry, noting in a report last week that thanks largely to cuts in worldwide production (and a steady increase in demand) the outlook for coal was “slowly thawing”

As well as seeing the start of a price thaw, UBS added two wild cards to its coal outlook report.

One is the potential for even deeper cutbacks in China and the other, tougher regulation of coal production in Indonesia.

Events in China, according to the bank, point towards the potential for a coordinated 10% cut in national coal production, for a very interesting reason: China’s Government wants to boost the profitability of the country’s coal sector.

Indonesia’s possible crackdown on coal production is an equally hard political event to predict but it seems that a plan is emerging to cap total coal production at 400 million tonnes, also as a way of supporting coal prices.

There is a common thread linking each of the events tracked this week by The Hog and that is a word not heard too often in the coal world over the past few years: profit.

Hans and Fritz have already made a profit on their extra Whitehaven shares. Coal miners in India with a legal licence will also be booking profits as rivals are forced to consider their mining plans. UBS sees the start of a thaw, and ICAP has opened a fresh trading book because its can smell a profit from providing a coal-trading service.

After three years of cuts, job losses and pit closures the coal-worm is finally turning for the better.